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Technical Session Agenda 2016 SPEE Annual Meeting
Monday, June 6, 2016 2016 SPEE Technical Session 1 Salon I/II
8:30 AM The SEC Reserve Reporting Standards: Challenges of a Lower-for-Longer Price Environment, Facts and Circumstances to Consider
John Hodgin
This presentation will examine the implications of the continuing low-price environment on a company’s ability to obtain financing and the impact that access to capital has on the classification and disclosure of a company’s undeveloped reserves.
As part of this discussion, we will review the relevant definitions and disclosure requirements related to undeveloped reserves with a particular focus on the issues relating to a company’s ability to fund its projects under Rule 4-10(a)(26) of Regulation S-X.
BIOGRAPHY John Hodgin – Petroleum Engineer – SEC
John E. Hodgin is a Petroleum Engineer in the Office of Natural Resources, Division of Corporation Finance of the United States Securities and Exchange Commission in Washington, D.C.
Prior to joining the SEC in July 2012, Mr. Hodgin held a number of positions with Ryder Scott Company Petroleum Consultants in Houston, Texas. He served as the Managing Senior Vice President of the Geoscience Group, Corporate Executive Vice President and was elected President of Ryder Scott in 2005. John started his career with Gulf Oil Corporation where he was a development geologist in the New Orleans Division.
Mr. Hodgin earned a BS degree in Geology from Texas A&M University and is a licensed Professional Geologist and a licensed Professional Engineer in the State of Texas.
John has authored or co-authored a number of SPE, AAPG and Offshore Technology Conference (OTC) papers and has been published in Accounts, a publication of the Council of Petroleum Accounting Societies (COPAS), the Landman, a publication of the American Association of Professional Landmen (AAPL) and in the E-Section Report, a publication of the Oil, Gas & Energy Resources Law Section of the State Bar of Texas, on reserves related topics.
Contact Information: John E. Hodgin, P.G., P.E. Petroleum Engineer Office of Natural Resources Division of Corporation Finance U.S. Securities & Exchange Commission 100 F Street, N.E. Mail Stop 4628 Washington, DC 20549-4628 Office Direct Phone: (202) 551-3699
The SEC Reserve Reporting Standards
Challenges of a Lower-for-Longer Price Environment
Facts and Circumstances to Consider
Presented ByJohn HodginJune 6, 2016
Disclaimer
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
1
2
Challenges of a Lower-for-Longer Price Environment
Today’s Presentation WillFocus on Rule 4-10(a)(26):“financing required to implement the project”
Introduction
3
This presentation will examine the implications of the continuing low-price environment on a company’s ability to obtainfinancing and the impact that access to capital has on the classification and disclosure of a company’s undeveloped reserves.
As part of this discussion, we will review the relevant definitions and disclosure requirements related to undeveloped reserveswith a particular focus on the issues relating to a company’s ability to fund its projects under Rule 4-10(a)(26) of Regulation S-X.
To facilitate our discussion, we present two hypothetical scenarios reconciling the changes in a company’s undeveloped locationsfrom one reporting period to the next.
Our first illustration describes a hypothetical scenario in which our example company proposes to revise the development planused in the reserve report as of December 31, 2014 to reschedule undrilled 2015 proved undeveloped locations to new dates.Our example begins with an examination of the proved undeveloped locations scheduled in the reserve report as of December 31,2014, reconciles the number of previously scheduled locations to the number of locations actually drilled during the year,analyzes the company’s liquidity and capital resources, and reviews the relevant definitions and disclosure requirements leadingto adoption of a revised development plan and schedule for use in the reserve report as of December 31, 2015.
Our second illustration describes a hypothetical scenario in which our example company proposes to revise the development planand schedule used in the reserve report as of December 31, 2014 and reclassify the undrilled 2015 proved undeveloped locationsto probable undeveloped. Our example incorporates a review of the company’s liquidity, capital resources and the relevantdefinitions and disclosure requirements leading to adoption of a revised development plan and schedule for use in the reservereport as of December 31, 2015.
Our examples present a limited set of hypothetical scenarios for illustration purposes. Each company’s particular facts andcircumstances will impact its estimation and disclosure of undeveloped reserves from one reporting period to the next.
The presentation also examines the relevant definitions and disclosure requirements related to the disclosure of drilleduncompleted wells and the internal controls relating to the undeveloped reserves.
Implications of the Continuing Low-Price Environment on a Company’s Financial Condition
4
• What is the company’s particular “story?”
Access to Capital
DevelopmentPlan & Schedule
UndevelopedReserves
Challenges of a Lower-for-Longer Price Environment
Facts and Circumstances to Consider
Illustration One
5
Reconcile the Previously Disclosed PUDs
6
Reserve Report
as of
December 31, 2014
Proved UndevelopedGrand Summary
As of December 31, 2014
No. of Loc2015 102016 102017 102018 102019 10
2015 Actually Drilled PUD Locations
What about the 6 undrilled PUD locations?
ScheduledLocations
Perform an Analysis of the Liquidity and Capital Resources Relating to Funding
7
Does the company have enough capital/liquidity available to do the things they say they will do?– Capex– Debt servicing– Dividends or cash distributions
What is the status of the company’s credit facilities/debt?– Fully drawn or remaining availability?– Risk of borrowing base redetermination?– Compliance with covenants at risk?
If Funding Is Available, Conduct a Review of the Relevant Definitions and Disclosure Requirements
8
2015 Undrilled Prior PUD Locations
Complete the Requirements Check List
9
2015 Undrilled Prior PUD Locations
Revise Development Planand Reschedule PUDs to New Date
Rule 4-(10)(a)(26)
Rule 4-(10)(a)(10)
Rule 4-(10)(a)(31)(ii)
C&DI 131.04
Requirements Check List
Revise and Adopt a New Development Plan and Schedule
10
Reserve Report
as of
December 31, 2015
2015 Undrilled Prior PUD Locations
Revise Development Planand Reschedule PUDs to New Date
Challenges of a Lower-for-Longer Price Environment
Facts and Circumstances to Consider
Illustration Two
11
What if the Company Proposes to Simply Change the Reserve Category?
12
Reserve Report
as of
December 31, 2015
2015 Undrilled Prior PUD Locations
Revise Development Planand Reclassify PUDs to Probable
Complete the Requirements Check List
13
2015 Undrilled Prior PUD Locations
Revise Development Planand Reschedule PUDs to Probable
Rule 4-(10)(a)(26)
Rule 4-(10)(a)(10)
Rule 4-(10)(a)(31)(ii)
C&DI 131.04
Requirements Check List
Other Requirements to Consider
14
2015 Undrilled Prior PUD Locations
Prior PUDs Reclassified to Probable Undeveloped Rule 4-(10)(a)(31)(ii)
“Scheduled to be drilledwithin five years”*
*Exceptions for nonprovedconsidered
C&DI 131.04
Not to scale
RESERVES
PRODUCTION
PROSPECTIVERESOURCES
UNRECOVERABLE
UNRECOVERABLE
LowEstimate
BestEstimate
Range of Uncertainty
TOTA
L PE
TROL
EUM
INIT
IALL
Y-IN
-PLA
CE (
PIIP
)
DISC
OVER
ED P
IIPUN
DISC
OVER
ED P
IIP
CONTINGENTRESOURCES
Probable PossibleProved
1P 2P
1C 2C 3C
HighEstimate
3P
Incr
easin
g Ch
ance
of C
omm
ercia
lityCO
MMER
CIAL
SUB-
COMM
ERCI
AL
What if Financing Is Not Available?
15
Rule 4-10(a)(26)“financing required
to implement the project”
RESERVES
Not to scale
RESERVES
PRODUCTION
PROSPECTIVE
RESOURCES
UNRECOVERABLE
UNRECOVERABLE
Low
Estimate
Best
Estimate
Range of Uncertainty
TOTAL PETROLEUM INITIALLY-IN-PLACE (PIIP)
DISCOVERED PIIP
UNDISCOVERED PIIP
CONTINGENT
RESOURCES
Probable
Possible
Proved
1P
2P
1C
2C
3C
High
Estimate
3P
Increasing Chance of Commerciality
COMMERCIAL
SUB-COMMERCIAL
What About Drilled Uncompleted Wells?
16
Where are your DUCs? Rule 4-(10)(a)(26)
Rule 4-(10)(a)(10)
Rule 4-(10)(a)(31)(ii)
Scheduled within five years of initialdisclosure as PUDs
Items 1203(c) and1203(d)
C&DI 131.04
Requirements Check List
Examine the Internal Controls Relating to Your Undeveloped Reserves
17
C&DI 131.03
“internal factors (for example, shifting resources to develop properties with higher priority)”
“the extent to which the company has followed a previously adopted development plan”
Item 1202(a)(7) of Regulation S-K “internal controls the
registrant uses in its reserves estimation effort”
Issues Relating to a Lower-for-Longer Price Environment
18
• What is the company’s particular “story?”
Rule 4-10(a)(26) of Regulation S-X “financing required to implement the project”
Rule 4-10(a)(31)(ii) of Regulation S-X “development plan has been adopted”
C&DI 131.04 “mere intent to develop”
C&DI 131.03 “if a company has changed its development plan
several times without taking significant steps to implement any of those plans, recognizing proved undeveloped reserves typically would not be appropriate”
Facts and Circumstances to Consider
19
Today’s DiscussionApplies to previously
disclosed proved, probable and possible reserves, changes therein, and any newly added proved, probable and possible reserves
20
Questions?
Reference Documents1 Division of Corporation Finance: Regulation S-K Subpart 229.1200 [17 CFR Part 229]; http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml
2 Financial Accounting Standards Board: Extractive Activities-Oil and Gas (Topic 932), Oil and Gas Reserve Estimation and Disclosures http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820075990&blobheader=application/pdf
3Securities and Exchange Commission: Modernization of Oil and Gas Reporting; Final Rule [17 CFR Parts 210, 211 et al.]http://www.sec.gov/rules/final/2009/33-8995fr.pdf
4 Division of Corporation Finance: Compliance and Disclosure Interpretations; Issued Oct. 26, 2009; Updated May 16, 2013http://sec.gov/divisions/corpfin/guidance/oilandgas-interp.htm
5 Securities and Exchange Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operationshttps://www.sec.gov/rules/other/33-8056.htm
6Securities and Exchange Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operationshttps://www.sec.gov/rules/interp/33-8350.htm
7 Morales, E., Lee, W.J.: “Undeveloped Reserves and the Five-Year Time Limit: Can Different Interpretations Coexist?”, SPE paper 166185 presented at the 2013 SPE Annual Technical Conference and Exhibition, New Orleans, 30 September-2 October and revised for publication in the SPE Economics & Management, Volume 7, Issue 1, January 2015
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http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820075990&blobheader=application/pdfhttp://sec.gov/divisions/corpfin/guidance/oilandgas-interp.htmhttps://www.sec.gov/rules/other/33-8056.htmhttps://www.sec.gov/rules/interp/33-8350.htm
Acknowledgements
Clipart Obtained from PresenterMedia http://www.presentermedia.com
Commodity Prices SEC first-day-of-the-month and 12-month average prices
Obtained from Ryder Scott Company https://www.ryderscott.com/wp-
content/uploads/May_2016_Prices.pdf
22
https://www.ryderscott.com/wp-content/uploads/May_2016_Prices.pdf
SPEE 2016 Presentation Lower for Longer_Hodgin1The SEC Reserve Reporting StandardsDisclaimerChallenges of a Lower-for-Longer �Price EnvironmentIntroductionImplications of the Continuing Low-Price Environment on a Company’s Financial ConditionSlide Number 6Reconcile the Previously Disclosed PUDsPerform an Analysis of the Liquidity and Capital Resources Relating to FundingIf Funding Is Available, Conduct a Review of the Relevant Definitions and Disclosure RequirementsComplete the Requirements Check ListRevise and Adopt a New Development Plan and ScheduleSlide Number 12What if the Company Proposes to Simply Change the Reserve Category?Complete the Requirements Check ListOther Requirements to ConsiderWhat if Financing Is Not Available?What About Drilled Uncompleted Wells?Examine the Internal Controls Relating to Your Undeveloped ReservesIssues Relating to a Lower-for-Longer �Price EnvironmentFacts and Circumstances to ConsiderSlide Number 21Reference DocumentsAcknowledgements
ADP184F.tmpBIOGRAPHY